SECURE Act May Put A Stop To Most Stretch Individual Retirement Account Planning

On December 18, 2019April 1, 2022 By Jane Fearn-Zimmer, Esq.In Retirement Planning, SECURE Act, Tax ReformLeave a comment

Good things come when you least expect them, but for wealthy retirees and their children and grandchildren, the Setting Every Community Up for Retirement Enhancement (SECURE) Act (passed in the United States House of Representatives on May 23, 2019) may not be one of them.

Congress presently has until December 20, 2019 to balance the federal budget for fiscal year 2020. The SECURE Act could become law as part of the new budget package.

For most Americans, their home and their retirement accounts are their largest assets. Viewed from the vantage point of retirees with large individual retirement accounts or qualified retirement accounts hoping to transfer much of their wealth to future generations, the SECURE Act is Trojan horse.

The SECURE Act would change the existing IRA and qualified retirement plan distribution rules, derailing many existing estate plans which incorporate stretch-IRA planning. Stretch-IRA planning is a distribution strategy popular under the current federal income tax law because it facilitates deferred taxation of retirement account income well beyond the lifetime of the original account owner.

Take the example of Mr. Jones. Supposed Mr. Jones is age 70, has $500,000 in his individual retirement account and has not begun taking any minimum required distributions. Mr. Jones is married and his wife is five years younger. If Mr. Jones dies at 70, and has not begun taking any required minimum distributions, his wife can roll the entire $500,000 from her late husband’s IRA into her own IRA and name a new, younger beneficiary. Assume that the wife has enough assets and income outside of the retirement accounts to pay for her care. Assume also that she dies at age 65 and prior to her death, names her 37 year old daughter as the individual retirement account beneficiary.

The daughter is much younger and has a longer actuarial life expectancy. Now the daughter will be the “measuring life” for the retirement account and under the current tax law, the daughter’s required minimum distribution could be approximately $11,000 per calendar year. If the daughter chooses, she may leave the remaining funds in the inherited IRA and can expect the funds to grow tax-free within the account for many years. Let’s assume that the daughter takes only the minimum required distribution with a 4% rate of return until she reaches the age of 56. At that time, her minimum required distribution may be approximately $23,000 annually and she can expect the account value to have increased to over $600,000. Using the stretch-IRA strategy, the father, mother and daughter in this illustration are able to defer taxable income for many years.

The SECURE Act would curtail stretch retirement account planning for account owners who die before beginning to take their required minimum distributions by forcing their younger, non-spouse beneficiaries to take large distributions of income over a compressed ten year period of time beginning after the death of the original account owner.

If the SECURE Act were passed in its current form, and if the father and mother in the example above died after December 31, 2019, the daughter would have to distribute out the entire $500,000 from the retirement account within a ten year period. During this period, she could potentially be in her peak earning years and in a higher income tax bracket, than she might expect to be after her own retirement. This provision of the SECURE Act threatens to dramatically increase the collection of income tax dollars by forcing distributions from retirement accounts over a compressed period of time. The tradeoff for the repeal of the stretch IRA is the SECURE Act’s deferral of the required beginning date for taking required minimum distributions to age 72. The SECURE Act also facilitates the ownership of annuities within retirement accounts.

For retirees with large IRA’s or retirement accounts wishing to transfer their retirement account proceeds to their children, grandchildren or other non-spouse beneficiaries, it is very important to contact an estate planning attorney to review their options in light of the changes the SECURE Act will probably bring.

The silver lining is that retirees whose intended beneficiaries have special needs or chronic illness will have important planning opportunities under the new law.

Questions? Let Jane know.

Jane Fearn-Zimmer is an Elder and Disability Law, Taxation, and Trusts and Estates attorney. She dedicates her practice to serving clients in the areas of elder and disability law, special needs planning, asset protection, tax and estate planning and estate administration. She also serves as Chair of the Elder & Disability Law section of the NJSBA.

Jane’s Top Tips for Planning for the Elderly and the Disabled In light of the Tax Cuts and Jobs Act of 2017

On September 18, 2018September 5, 2022 By Jane Fearn-Zimmer, Esq.In Elder Law, Tax ReformLeave a comment

Last week, my colleague, Steven Sacharow, Esquire, an outstanding and personable attorney who limits his practice to family law, adoptions, and “corporate divorces,” and I, co-presented a seminar addressing how the new federal tax laws will impact divorcing, elderly and/or disabled clients in in New Jersey and Pennsylvania. Here is a link to the Facebook Live presentation, and following are my top seven tips for saving hard earned dollars for the elderly and disabled under the new tax regime.

Medicare is not a Long-Term Care Plan. Some folks expect Medicare to pay the cost of any care they may need. Medicare may provide for some short-term care, for a limited period of time, subject to a co-pay after the first twenty days per spell of illness, but will not provide for any long-term care absent a three day qualifying hospital stay. Do not let your loved one be placed on “observation status” in the hospital.
Plan ahead for Long-Term Care. The sweeping cuts in the TCJA will increase pressure to trim federally funded social welfare programs. The House GOP budget plan proposed to trim over $5 billion dollars from the Medicare program over a ten year period, and an additional sum of more than $1.5 trillion dollars from Medicaid and other health insurance programs. Plans included proposals to change Medicare to a capped dollar benefit or a voucher system, which could be used to purchase health insurance. Block grants were proposed to shift Medicaid costs to the states (and ultimately the taxpayers). Lacking legal effect, these proposals may be harbingers of the future. Advance planning is more important than ever, and even crisis planning can help some individuals. Strategies to pay for long-term care may include long-term care insurance, planning with Medicaid compliant annuities and IRA annuities, and trusts. For detailed strategies to save with long-term care insurance, see my handout, available here.
Consider an ABLE account. ABLE accounts are special, tax-favored disability savings accounts available to qualified disabled individuals with a serious disability incurred prior to age 26. In 2018, up to the sum of $15,000 per disabled beneficiary may be contributed to an ABLE account for the disabled beneficiary. (In 2018, an additional sum of up to $12,060 may be contributed by the disabled beneficiary from his or her own funds, in limited circumstances, as is further discussed in section 5, below). The funds on deposit in an ABLE account are disregarded in determining eligibility for federal public welfare benefits, such as Medicaid, Supplemental Security Income (SSI), Supplemental Nutritional Assistance (SNAP), Section 8 housing and other programs. (The disregard is subject to a $100,000 cap for recipients of SSI). Funds distributed from an ABLE account may be used to pay for qualified disability expenses, which can include shelter and housing expenses, educational, transportation, assisted technology, health and other expenses incurred with respect to the qualifying individual’s disability. Beginning this year, up to $15,000 of funds on deposit in a 529 educational savings account may be rolled over annually, tax-free into an ABLE account for the beneficiary of the 529 educational account, or a sibling or step sibling of the 529 account beneficiary, provided that the ABLE account beneficiary is a qualified disabled individual. For more information, see my blog post on ABLE accounts.
Only one ABLE account and one $15,000 contribution per calendar year per qualified disabled beneficiary. This general rule, subject to some exceptions, can be a concern in families of divorce, due to communication issues. Accountants, attorneys and financial planners can help their clients by reminding them of the rule in their annual year end planning letter, on their websites or in their intake materials.
Leverage the ABLE contribution. The TCJA now allows some qualified disabled individuals to contribute up to the sum of $12,060 from their taxable income to an ABLE account, in addition to the $15,000 annual contribution, which is tied to the annual exclusionary amount of IRC 2503. The saver’s credit may also be available to some ABLE account beneficiaries.
Don’t forget about deductions! The TCJA left intact the credit for the elderly and disabled under IRC 22, and the ability to deduct the excess of the taxpayer’s reasonable and necessary medical expenses in excess of 7.5% of adjusted gross income. Deductible medical expenses may include health insurance premiums, some long-term care insurance premiums, some cosmetic procedures needed to ameliorate a deformity arising from a congenital birth defect or to correct a trauma or disfiguring disease. For example, breast reconstruction after a mastectomy may be deductible. Rev. Rul. 2003-57. The medical component of long-term care can sometimes be deductible, as can room and board costs, where medically necessary for dementia care. See Estate of Baral v. C.I.R., 137 T.C. 1 (July 5, 2011). The TCJA also left intact the deduction for qualified adoption expenses.
ROTH IRA conversions may be new “Hotel California.” Given the historically low income tax rates, taxpayers in lower income tax brackets may want to consider converting a traditional IRA or a qualified plan account to a ROTH IRA, so long as the conversion does not bump the taxpayer into a higher bracket. However, the TCJA transformed the partial ROTH conversion into the new “Hotel California.” (i.e., “You can check in any time you want, but you can never leave.”) Taxpayers can still return an excess ROTH contribution before December 31 of the taxable year in question, but can no longer partially re-characterize a ROTH IRA conversion after the conclusion of the taxable year.

Questions? Let Jane know.

Estate Planning Check Up and the New Tax Laws

On April 26, 2018April 1, 2022 By Jane Fearn-Zimmer, Esq.In Estate Planning, Tax ReformLeave a comment

The Tax Cuts and Jobs Act of 2017 enacted the most sweeping changes to the federal tax code since 1986. Many people assume that due to the increase in the basic exclusion amount (BEA) to $11,180,000 per individual, only the wealthiest need now estate planning. That is just not true!

Certainly, many fewer federal estate tax returns will be required to be filed. However, it is still important to periodically review your documents and your estate plan. Most clients should review their existing wills and trusts. Particularly where a formula bequest was incorporated, the estate plan must be reviewed to ensure consistency with the client’s legacy goals. This is due to the increase of the BEA. The BEA functions like a sponge to limit or prevent a decedent from any federal estate tax liability at death. The BEA soaks up the decedent’s aggregated lifetime gifts and the assets remaining in the decedent’s estate at the moment of death, allowing the donor’s wealth up to the BEA limit to be transferred free of federal estate and gift taxes. Beyond the BEA, the estate will incur federal estate transfer tax liability. When the BEA was significantly lower, it was very common for estate planners to draft formula bequests, which allocated all of the decedent’s assets up to the decedent’s basic exclusion amount, to a “credit shelter trust” for the benefit of the surviving spouse and/or the descendants of the decedent. The remaining assets would pass outright to or in trust for the surviving spouse. With the doubling of the BEA and with credit shelter trusts which do not name the surviving spouse as a trust beneficiary, those estate plans will now disinherit the surviving spouse, and the surviving spouse will then be entitled to a one-third elective share of the decedent’s augmented estate in New Jersey. The solution is to update the estate planning now, possibly with a disclaimer formula. The new law sunsets on December 31, 2025.

At least until the new law sunsets, under the current regime, family limited partnerships remain a viable planning strategy, with the possibility of discounts for lack of marketability and lack of control. Trusts will continue to be useful for non-tax reasons, including privacy by avoiding the probate process, creditor protection, curbing spendthrift children, centralizing asset management, fostering family harmony through controlled asset disposition, and preserving a fund for a special needs beneficiary while protecting the beneficiary’s Medicaid and SSI eligibility.

Questions? Let Jane know.